The five key ESG questions investors are asking

As new European regulations give investors responsibility in safeguarding the environment, ESG has come of age. Just as legislators intended, the impact on listed companies is dramatic. To remain investable across the market, every business will now have to deliver sharper and more detailed ESG narratives, as well as the data to back them up. As you prepare your response, make sure can answer these five key questions that engaged investors are almost certain to fire at you: #1: Why did you choose those exact metrics and methods? ESG isn’t (yet) like a balance sheet. It’s measurement and reporting isn’t (yet) defined by a standardised set of data points and principles. Investors are professional sceptics, so you’ll need to justify – and fiercely defend – your choice of metrics and methods. Focus on explaining that your data provides an accurate representation of your ESG position and that it’s creditable, straightforward and consistent. To ensure confidence, highlight your ESG metrics in all your financial comms and presentations. Keep on demonstrating that you believe in your methods and approach and state the reasons why the business is dedicated to improving its ESG performance. #2: Why have you changed your ESG reporting method? As the world has yet to standardise, it’s inevitable that you’ll upgrade your reporting methods. It is, in fact, to be encouraged. However, sceptical investors are on the look-out for greenwashing and changes in methods are a well-known way of obscuring uncomfortable truths. To avoid this suspicion, ensure that you have an overlap year where you report both the old and new metrics. If there are any poor performing data points, keep reporting on those until you have seen significant improvement. And if there are data points you do not capture but are relevant for your sector and you know your peers are capturing, explain the steps you are taking to report on them. #3: Why have you not adopted best practice? Of course, there is no agreement on what best practice means. One investor prefers the Task Force on Climate-Related Financial Disclosures whilst another champions the Sustainability Accounting Standards Board and other are building their own bespoke frameworks. Navigate this by having a clear explanation of your chosen frameworks and method. However, to make sure your case is arguable, you need to comply with a trend all investors are gravitating towards – materiality. Investors want to know the impact your business is having on the environment and other human beings with the same precision that you report your financials. If you cannot adopt an established framework, find out which data points investors believe are misleading or superficial and avoid them. Always disclose the frameworks you have used and the ESG advisers you have employed. To outline your long-term commitments, establish a sustainable rating agency aspiration. Remember that climate costs and risks continue to be core to investors’ ESG considerations. Investors need to know your effect on the environment so they can fulfil their own stewardship role. Avoid criticism by publishing decision-relevant information on the environmental effect of your operations. Investors want to understand your Scope I (direct) greenhouse gas emissions and Scope II (indirect) and finally Scope III (all other indirect emissions that occur in your value chain. #4: What is it about your ESG performance that makes me want to invest? Capitalism may have caused climate change and social wrongs but it may also be our best mechanic to solve them. Even the investors most passionate about ESG are betting that the global financial system which got us into this mess can help get us out of it. Your smartest move is to show you recognise this. A material link between ESG performance and board remuneration is perfect as this re-establishes the link with shareholders’ interests. Investors less concerned with ESG won’t object when they see the evidence that a company’s financial results are positively correlated with its ESG performance. This is also an insurance policy against claims of greenwashing. #5: Does your sustainability executive sit on the board? There is only one correct answer – yes. And now is the time to get it done. Commitments to ESG need to be supported by real action and investors will expect the management team to be fluent in discussing these matters from both a financial and a societal perspective. Let them know you are taking these issues seriously by appointing an ESG executive and giving them a board seat. This will reassure all stakeholders that ESG understanding and action goes from top to bottom. Thank you for reading these insights into ESG. If you would like to discuss these issues further, please reach out to me, Kelly Perry kperry@edisongroup.com or complete the form below.